What Information System Holds in Accounting Industry\'s Future

¶ … Information System holds in Accounting Industry's future?

Looking through the glass and estimating what the future holds for any individual or profession is always a difficult exercise as the trends in any business or profession may change and so the path of development. It is better to look at the experience of some companies whose systems have changed over the past few years and thus try to estimate what is likely to happen.

There are many changes that have come to the world through the development of Information Technology and Computers. All the changes have come over a relatively short period of twenty years, and in many cases both industry and concerned humans are yet to adjust to the changes. There are many changes which have come in the accounting industry also, and those changes give an idea of what is likely to happen in the future.

The organization where the changes have taken place and we are talking about is Microsoft Corporation and even five years ago it took the organization fifteen days every month to prepare the results of the organization and then print as many as 350,000 copies of management reports which had to be sent out to the managers so that they could take the needed steps. (Accounting -- The Digital Way) The situation has changed today where the information at the end of the month is prepared within four days, and there is no requirement to send out these reports. The expectations of the accountants are to keep the accounts current, every day of the month. The concerned information is passed on to the managers and they can use the information in a way that they choose to. If they want they can reorient the information in a manner which would help them to understand the situation of the organization better. If they choose to, they can find out the source of those figures and where they have from.

It is important to understand the implications of these changes and whether this sort of changes can be organized by other organizations should they choose to. The change that we are seeing is to make accounting more relevant, timelier, and more actionable by the managers who get the information. It is true that accounting figures are also required for certain purposes of taxation, reporting and records, but that is an entirely different exercise. The speed of accounting of an asset helps the organization to use the financial assets or liabilities that it has as a trading instrument and this has occurred due to amendments to IAS 39. The designation as a trading instrument must be decided when the instrument is initially reported to the tax authorities. The advantage of this designation is that the company can meet the aims of hedge accounting without the company having to invest in items that really meet the hedge accounting criteria. The concerned difficulty is that this designation as a hedge instrument remains permanently. Thus when the use of the instrument is changed from an instrument under hedge, the value of the item has to be reported the item at the current fair value. When increases and decreases occur in fair value, these also have to be reported and reflected as income. (Accounting and Reporting for Financial Instruments: International Developments)

The earlier rules for hedge accounting used to permit the amortization of the adjusted value of the hedged instrument into income over the balance period of the instrument when there is discontinuation of the fair value hedge relationship. Under the new rules the considerations have to be whether the transaction meets the requirement for removal of all or only a portion of financial asset or group of financial assets, proofs that the asset was in fact transferred, on transfer whether the risks and rewards of ownership are also transferred, and if parts of the risks and rewards have been retained, then whether the control of the asset has been given up.

These are the requirements for the removal of a financial liability from the balance sheet and the debtor has be discharged from the liabilities to the creditor through repayment, legal release from the debt or cancellation or expiration of the obligation. There are also cash flow hedges and those are used to reduce the exposure that is associated with the variability of cash flows that occur. The reasons for these may be due to an asset, or a liability, or a purchase or sale. The gain or loss of the cash flow hedge can be considered to be a portion of equity till the cash flow is complete and only then the accumulated gain or loss can be adjusted to the total value of the asset or liability and reported accordingly in the net income or loss for the period. These are amendments which are bringing the U.S.GAAP and the rules for IASB close, yet there are differences. (Accounting and Reporting for Financial Instruments: International Developments)

Thus there are a lot of changes taking place in accounting rules at different times, and this has to be informed to different persons in the organization, so that the organization can get the maximum benefit from the changes. The decisions may be required from individuals, who are not accountants, and they have to be informed in detail, and they may not be physically situated at a distance where the information can be informed easily. Under such circumstances, it is certainly easier to develop a method of communication through Information systems.

The entire process of this exchange of information started about ten years ago as at that time the personal computers began to replace mainframe computers, and those personal computers had enough power, computation capacity and ease of use to make them a business tool. They began streamlining manual processes, managing data and exchanging knowledge. Slowly the PC developed through gradual linkage to all areas of the organization and then further networking has now been achieved with Internet. These changes have brought about a medium through which information can be transmitted all over the world internationally. This has led to a situation where the value of a company is being judged not only through the assets and liabilities, but also its ability to use information at a lightning speed. Corresponding to this, there is now an increase in channels for distribution, and this requires far better control which is helped by personal computers and the Internet. The additional channels require control of inventory, collections, and accounting for collections from all over the world even more difficult. At the same time, the changing nature of business is making it clear that businesses have to reorient themselves to the changing world at a rapid pace. (Accounting -- The Digital Way)

Another important point for companies is now the Sarbanes-Oxley Act of 2002 and there will be help for companies that implement them to identify weaknesses in internal controls over financial reporting and correct weaknesses through enhanced internal controls. The remedial actions when shown are also evidence to the shareholders and the financial community that the companies are trying to solve the problems of weaknesses. The material actions to be remedied were viewed as being of a material nature in 60% of the cases and less material in the balance 40% of the cases. The weaknesses in internal control can relate to weakness in design or the operation of internal controls. The disclosure did not always distinguish between the implementation of additional controls that are needed to correct design deficiencies or improve operating deficiencies. The attention of most companies was on improving operating efficiencies rather than correcting design deficiencies. The biggest deficiencies were in the areas of inadequate staffing, inadequate segregation of duties, problems with the financial closing process, and account reconciliation. (Toward Improved Internal Controls)

These are matters that can be easily solved through implementation of Information systems for the accounting processes. In that case the problems of staffing can be solved easily and changing of financial closing process, or accounts reconciliation are just matters of using different software for taking care of the accounting process. Going further on the subject, there was an article in November 3, 2004 Wall Street Journal which praised the efforts of Catalina Marketing as a company that had understood the importance of disclosure of remediation efforts. That company filed 10-Q which highlighted four areas where control deficiencies had been identified -- the structure and design of reporting process of certain financial reporting, inadequate or ineffective policies for documenting transactions, design of policies and execution of processes concerning accounting for transactions and the internal control environment. Around 25% of the companies had accepted the need to improve internal control documentation and remediation of deficiencies regarding documentation. (Toward Improved Internal Controls) This is likely to result in a demand for staff both in the organization and outside who can help them, as also information systems that will be designed to help these companies.

The professionals in finance are expected to keep pace with the changes that are taking place in the world of finance, and at the same time provide accurate and timely information to the employees so that corrective action can be taken. Digital technology has made it easier to collect the data and move it all over the world, but at the same time, this has led to the production of an enormous amount of data which is difficult to handle. The challenge is now in filtering, sorting out, analyzing and compiling this data in a manner that will ultimately add value to the organization whose data it is. In Microsoft there were 54 financial groups charged with the responsibility of organizing the financial data of 85 of their subsidiaries which provided the services of Microsoft all over the world. To solve the problem, they built up a system which they called the financial 'digital nervous system'. (Accounting -- The Digital Way)

This was responsible for sending the financial data to all parts of the organization in a coherent manner. This gave all employees access to real data on time. This network permits the employees to submit even mundane items like their travel expense statements, as also purchase goods and services, and even purchase capital assets. All this can be done from their desktops and that reduces the concerned time, paper, and costs for publishing and distribution. The system makes it possible for all employees to get the information they require even without any knowledge of programming. This has led to the addition of value to the information while spending less time in processing of information. (Accounting -- The Digital Way)

It is clear that there are changes in the role of accountants in organizations and various factors are mentioned by different people, but the reason that is being given now is the competitive situation that has existed since the 1990s and the competition is at the global level. Some feel the view of competition is rather rhetorical and not economical, but that is only a point-of-view. The most important aspect is the view of the situation in the minds of the managers and accountants and the corresponding view of the economic situation under which they are operating. When the general view is that more of competition now exists, then the mangers and the accountants are going to provide an extra emphasis on the markets and consumers. Again the view of emphasis on customers may not be really happening in practice, but when one looks at the performance of companies, there seems to be an extra emphasis that is being given to customers and the service is being provided through the market. Much of the change is taking place through the developments of information technology. The speed of this change has changed over the last 30 years and the biggest influence on the managers and accountants has been due to the advent of the PC. (The Changing Nature of Management Accounting)

Over the period of the last 5 or 10 years it has been seen that computers are stepping into companies and that has affected the work in organizations. The effects have been on clerical work and on information flows within the organization. The changes have been accelerated by the developments in information technology during the recent period. The speed and capacity of the systems have changed and along with that there has been development of data base technologies. These provide the capacity to store large amounts of data and yet keep them accessible. The change in technology has made it possible for different users to use the data at the same time, and the use does not have to be in the same way. The analysis of the information can be in different ways. Thus the information can be designed in a way so that it can meet the needs of different users requiring different parts of the information for different purposes. The same database is now providing the information for different accounting systems and the systems are then being integrated through the information systems.

The information is now not controlled only at one level of the organization and this is happening as many persons within the organization have PCs on their desks. This helps them get the information they want. In the earlier era they had to ask the accountants for the information and this was even more applicable for all financial information. This was done in spite of the fact that some managers maintained their own informal records, yet the formal maintenance of information was the responsibility of the accountant. Now it is expected that individual managers will maintain the information regarding their own area of activity, and this is maintained within their PC. Thus when the information is required, they can just pull it out, and this information is not always the information on which the organization works. This makes it clear that the role of the accountant has changed from the provider of information to a user of the new broader information system. This is affecting their roles and numbers. It was seen that in a UK-based manufacturer of healthcare products, the number of persons in the accounting department came down from 120 to 60. This is not a situation only in that organization, but was seen in all other organizations. It is clear that these are the results of computerization of records and processes and an indirect result of the advances in information technology. (The Changing Nature of Management Accounting)

There is a new system called XBRL that is supported by international bodies of accountants and individual accountants who are desirous of active involvement in the development and implementation of new systems in their area. The system is a freely available electronic language that can be used to format financial reports for sending all across the Internet and then seeing the same on computers with browsers. The persons who prepare and use financial information can use XBRL in all software and technology so that the global capital market can reach levels of greater productive efficiency. In a way, it is a method of changing the entire system of financial information being shared, used and analyzed. The name XBRL denotes for 'Extensible Business Reporting Language'. It is a development of Extensible Markup Language, also called XML. This makes it a platform independent, expandable and standardized method of exchanging information. It can be used all alone or developed into other computer applications for the purpose of sharing information. The language was developed through a special international project. (XBRL: Moving Toward a Common Language for Financial Reporting)

This language based on XML automatically and transparently 'tags' each part of computerized business information with an identification code or marker. These markers remains attached to the information in spite of all formatting or rearrangement by browsers or software applications that the information passes through. Prior to this method there was no common accepted format for preparing reports of business data. There is the possibility of errors in the labor intensive tasks of entering and reentering data into computer application during the process. The use of this method is simplifying the process with the possibility of lowering costs and ensuring the integrity and quality of the data. With the new system, once the financial information is created and formatted for the first time, the data can be transferred to any other required format. There can be preparation of a financial statement, a document in HTML. A document required by regulations for filing, credit reports or loan applications from the original information without a retyping of any data or reformatting of the data.

The system provides easier access to accurate financial data for the companies and provides for easier analysis of the data. In this manner the new system adds value for any organization which wants to use its business data. This is the way it is expected to provide benefits for all uses of such data- public and private companies, accounting professionals, regulators, analysts, investors, capital markets, lenders of funds. This also helps the persons dealing with the data like software developers and data aggregators. This provides company management to move data quickly across the board though the data may be stored at different places within the organization, so that the data can reach required persons within the company as also the shareholders. Organizations dealing with accountancy see the development of this system as a step to increased clarification and development of the purposes of business in sending the data from the business to the outside public. Of course, this is only a tool. Another benefit from the method will be to place accountants as sources of knowledge for the clients or firms to whom they render service. The method helps businesses to use emerging technologies and will thus be of help to accountants increase their professional opportunities and prices for their services. (XBRL: Moving Toward a Common Language for Financial Reporting)

The new method is being accepted throughout the world by businessmen who see it as a development of changing the methods of communication and conduct of business. The system is being accepted by many international organizations. Reuters was the first public listed company in the world to release and publish year end financial results using XBRL. There has been an announcement from Microsoft that it will be the first high-technology company to publish financial statements on the Internet using the method. This announcement was widely noticed, as it was felt that Microsoft would become a supporter for the entire benefits that the system can offer the market. One of the world's largest regulatory agencies, Australian Prudential Regulatory Agency has announced that it was going to use the system to monitor the financial health of 11,000 super funds, insurers and banks in the reports that these organizations are required to submit to the agency. This is the first regulator in the world to start using XBRL. Among banks, the new method has been taken up by Bank of America to start using XBRL for collecting financial statements from the national customer base that they have. Deutsche Bank has also announced that they would be using the system for processing of loan information and streamlining the entire process of credit analysis. (XBRL: Moving Toward a Common Language for Financial Reporting)

It is not only accounting which is changing, but even changes are in store for auditors. There had not been any major changes from 1967 and authoritative auditing standards were primarily concentrating on the ownership and custody of auditor's work-papers and there was only very broad guidelines regarding content and objectives of those papers. There was a plan for revision and when the Enron scandal broke in October 2001, the changes were still in progress. The accusation against Arthur Andersen regarding its conduct of Enron audits focused mainly on the destruction of documents. The result of all this was the Sarbanes-Oxley Act of 2002. That created the Public Company Accounting Oversight Board or PCAOB, and the function of PCAOB was to establish regulatory documentation and records-retention standards. The new authority perceived softness of SAS96 and set up new standards for audit documentation and records retention and accordingly developed Standard 3. The application of new standards is compulsory after November 15, 2004 and the new standard applies to financial statements and SOA section 404 internal control audits for all SEC issuers. It also applies to reviews of quarterly financial information which are filed in Form 10-Q or 10-QSB. (Audit Documentation: It's a Whole New World)

The new SAS that has been proposed will take effect only at the end of the current year and will have to be used for audits beginning from 2006 that is audits for accounts ending after December 15, 2006. Once the new system is declared, it will apply to all audits of financial statements of non-SEC audit clients. The new audit documentation has to show that the work was done as per the applicable standards, must provide a clear link to important matters and has to contain sufficient information, in sufficient detail. The material should enable an experienced auditor to understand the nature, timing, and extent of the auditing procedures planned; the work performed; the purpose of the work; the source of the information analyzed and supporting evidential matter obtained, examined, and evaluated; and the conclusions reached. The reasons why audit documentation are required for assisting auditors to plan and perform the audit; assisting those responsible to direct, supervise, and review the work performed; providing and demonstrating the accountability of those performing the work i.e., compliance with applicable standards; assisting quality-control reviewers to understand and assess how the engagement team reached and supported significant conclusions; enabling internal and external inspection teams and peer reviewers to assess compliance with professional, legal, and regulatory standards and requirements; and assisting successor auditors. (Audit Documentation: It's a Whole New World)

For the storage of audit documentation and work-papers any medium can be used but they have to contain audit programs and other planning documents; analyses; memoranda; confirmations; representation letters; checklists; extracts of important documents; significant correspondence; and details of tests performed and documents examined. The list is not new but it has been seen from the time of the Andersen case auditors have to be more disciplined about storing significant e-mails in their work-papers. Those have to be retained and ones not useful, deleted. It is clear that there is now an extra insistence on storing material as proof of their proper decisions. Most of the companies now have significant portions of their accounts in the electronic medium and so part of the storage have to be in the electronic medium. This is a change that is bound to come. (Financial Reporting on the Internet -- Instant, Economical, Global Communication)

In any country which has a capital market, practically all the major companies have their own websites and on these sites there is always some forms of financial reports. It is almost essential that companies which have services beyond their own national borders have some financial information that is provided as this information will be used by international investors. The information is easily available to any individual with an Internet connection. The additional costs to the companies are marginal as the companies are already incurring the costs for the website, while this method gives them a global reach. One can go through these sites to get a measurement of the information that is provided in these sites. The methods of presentation are varied -- from summary financial statements to detailed financial statements as also the styles of presentation of these documents. The methods of going through these sites are also in the websites and these may be hypertext or search box or some other tool. These are also varied. The differences are not always matters to be criticized as they are part of experimentation that goes on at this stage to provide the final shape of reports on the Internet.

Yet some of the perceived differences may make it difficult for the persons viewing the information to understand the same. The differences between companies are so large that some viewers may be left with an impression that there are no rules for reporting on the net. This has led to a situation where the rules for financial reporting on the net have been fixed some institutions and for United States, the rules have been fixed by the Securities and Exchange Commission. They have now clearly stated in Securities Act release No. 33-7233 that "The liability provisions of the federal securities laws apply equally to electronic and paper-based media." (Financial Reporting on the Internet -- Instant, Economical, Global Communication) This means that the federal authorities are now viewing Internet as just another media and rules which apply to financial reporting on paper also apply to Internet.

At the same time, when one considers AICPA professional standards on auditing, there exists a certain difference of views. When one refers to the item on 'other information in documents contained in audited financial statements' as per auditing and interpretation of Section 550(AU 9550), the end of paragraph 16 is with the question "When audited financial statements and the independent auditor's report thereon are included in an electronics site, what is the auditor's responsibility with respect to other information included in the electronics site?" (Financial Reporting on the Internet -- Instant, Economical, Global Communication) The concerned answer appears in paragraph 17 and that states "Electronic sites are a means of distributing information and are not 'documents,' as that term is used in Section 550." (Financial Reporting on the Internet -- Instant, Economical, Global Communication)

This makes it clear that auditors are not required to read information that are presented in electronic sites or to decide whether the information in that site is consistent with the original documents. The examples of this can be seen in the section labeled as 'annual report' which is a part of many sites. The contents of this report are generally significantly different from the contents of the original, printed annual report. The annual report on the web may have only a summary income statement, a summary balance sheet and a letter from the chairman of the board. The companies which disclose much less than the information on the paper version, the most common missing item is the notes to the financial statements. (Financial Reporting on the Internet -- Instant, Economical, Global Communication)

The other difficulty is in the methods of getting the annual report. Some companies present it in an Adobe Acrobat 'Portable Document File' and these documents when downloaded and printed can provided a copy of the original printed annual report. At the same time, to get these documents, it requires the person interested to download and install Adobe Acrobat reader in their computers. The methods for this are not known to many users of computers. There are also computer users who are getting to the internet through certain methods like WebTV or the new methods of I PAQ of Compaq are not able to download or install Adobe Acrobat Reader. The size of these reports are also quite large and generally not less than 1.8 MB and goes up to a figure as high as 60 MB. These sizes would make it hard for individuals with a dial up modem from downloading the complete files.

Most of the organizations that shorten their financial statements on the net include an auditor's report. This report is generally the only place in a balance sheet that states clearly that the report is in conformity with GAAP. Then there is a concern within the company of associating an auditor's report with a statement that is less than an annual report. As it is in the process of making the summary the company is accused of including only the positive features of its performance and hiding matters which are not so flattering. This has led to a study of these reports by an audit firm and it found that companies with qualified auditor's reports were less likely to include the auditor's report with their balance sheet than organizations which had an unqualified report. Another problem is for the investor to decide on the beginning and end of such reports. Annual reports on the web generally have hyperlinks to outside areas of performance of the company. This happens as annual reports are only a small part of the total material on the web site of the company. (Financial Reporting on the Internet -- Instant, Economical, Global Communication)

For an increasing number of companies pages on investor relations will also have audio or video files of the occurrences at annual meetings. These may cause confusion within the minds of the consumers that these files also form a part of the annual report as they are very close and often linked by hyperlinks. For financial reports, the company may design the annual report for a financial analyst, but the same report may not appeal so much to an investor who may not have knowledge about financing to such a high level. At the same time, the general pages of the web are open to everybody. (Financial Reporting on the Internet -- Instant, Economical, Global Communication) These are problems with reporting on the net of annual reports by companies, along with other similar reports. There are also problems of collecting required information by the financial analysts or investors. There is a possibility of developments in this area also.

Apart from the development of knowledge through the use of computer, there are wireless devices like laptop computers or personal digital assistants which have the persons to keep in touch and thus help the productivity of the organization. At the same time, these organizations are likely to provide a source of attack for the Internet thieves. The devices which have wireless devices lie in the access points on the wireless network. This enables individuals to tap the continuous radio signal that is emitted. The requirement is of a laptop, a wireless adaptor and wireless scanning software. The individuals trying to intrude into a wireless unit with a four digit password are able to enter the system within less than a minute. When they have been able to enter the system, they steal the PIN and other financial information of the user or break into the main computer of the organization so that they can collect proprietary financial information. (Securing Wireless Networks against Intruders)

In some cases the intruders are industrial spies for getting trade secrets and competitive information, but the greatest number are those looking for credit card PIN and financial information. Some people who hack in are more interested in communication than money, and this may lead them to take off the e-mail site of the site and take over the website. This will be seen later by the employees that some outsider is using the site controls to divert all communication to some other pornographic sites. The solution of these problems is a challenge and when thee has to be a connection to the firm's computer network, a wireless device requires a wireless network adapter. There are not many organizations that have wireless network adaptors and thus it is essential that the default name is changed to a secure code. If this is not done, then it is easy for the intruder to break in and catch the communications of the party. (Securing Wireless Networks against Intruders) Thus it is always a matter of great concern how the systems are used.

Apart from everything else, all computer networks have many business applications and these come in the form of Local Area Networks, Wide Area Networks and mobile wireless networks. These contacts provide great value to business, and the utility is in form of sharing of data, software and hardware within the organization. When any organization has a network it is fast, cost effective and increases productivity of workers. It helps the computer administrators of the organization to use standard configurations. All the computers in the network are permitted to access, revise, add, delete and update the data exists on the file server that is reached by all. The LANs can get connected to each other through telephone lines and radio waves. Many companies have more than one office building and there a WAN is used to share business files and accounting information from all over the area. WAN is a geographically scattered telecommunication network that joins the LANs. (Computer Networks for Productivity Gains)

The networks that are set up can be used by information systems and network managers, along with support staff, that operate and maintain the system; application system developers that set up and modify the network; business managers that deal with network staff and make informed business decisions; customers and vendors of a company, who may need to be connected to the company's network to obtain relevant data; security personnel that use networks in order to implement security procedures to safeguard software and hardware; financial managers and analysts that are involved with appraising the funding for network equipment acquisitions; and accountants that have to audit the financial records on a company's network.

Even the auditors can use different software to check the network for faults or changes. The process of networking helps companies to provide better customer service as it gives them immediate access to their accounts. Thus for every enquiry of the customers, the required information can be traced and the final result is better satisfaction for the customer. It also helps the managers have better improved decision making as they can get better financial information. It gives them the capacity to monitor cash flow, spot problem areas in receivables or inventory and go through the fiscal conditions of the organization. At the end of it all, there is saving of time and money. The employees can also help the organization by taking care of more than one task. (Computer Networks for Productivity Gains)

It is very important now that all organizations who want to remain connected with accountants develop tools so that young accountants remain connected to them at the beginning of the development of their careers. One of the examples is the Kaplan CPA Review website and that is a marketing toll for an organization interested in profits. The objective of the organization is to make users buy the products and services of Kaplan. For this aim the website has two special approaches -- a general format as a product or service provider and a format based on the four different segments of the CPA examination. The advantage of this site is that it helps the user to minimize the process of searching. The website also provides video content. (Website of the Month: Kaplan CPA Review)